On Friday morning local time, renowned US investor Ray Dalio publicly stated that the rapidly growing US government debt is approaching a critical point that could cause even greater trouble.
The origin of this matter is that Dalio once proposed in September this year that "the United States is facing a debt crisis", so he was also asked on Friday whether his views have changed with the significant decline in the yield of US treasury bond bonds in recent days.
(Daily line chart of 10-year US treasury bond bond yield, source: TradeView)
Dalio smiled slightly at this and said that this was not a matter of 15 or 20 basis points fluctuation. What was more troublesome was the supply and demand of US treasury bond - such as the continuous and huge fiscal deficit, as well as the risks of "who will buy US treasury bond". We should know that many US bond buyers are still in a situation of huge floating losses.
According to the data on the official website of the US Department of Finance, as of September this year, the size of the US treasury bond had reached $33.17 trillion, a rapid increase of 45% since the COVID-19 broke out in 2020, of which about $27 trillion was held in the open market. In addition, the US government generated an additional $1.7 trillion in deficit last year to fund a series of fiscal investment policies. Under the influence of the Federal Reserve's interest rate hike, the net interest cost incurred by the United States in fiscal year 2023 reached $659 billion.
(Source: US Treasury Department)
As a well-known debt evangelist, Dalio pointed out that economic strength means financial strength, and financial strength means: can your income cover your expenses? As a country, do you have a good income statement and balance sheet? As this problem becomes increasingly serious, the United States is more likely to encounter this long-term problem. This is actually just a numerical issue, and the United States is approaching this turning point.
It is very interesting that, unlike many investors who have been betting on a steady decline in US bond yields in recent days, Dalio believes that the structure of US bond yields will remain roughly at the current level, possibly slightly lower, but there are also issues with supply and demand, especially on the demand side. Next, there may be a possibility of economic slowdown or even contraction in the United States, and the Federal Reserve may also slightly relax monetary policy. However, at that time, supply and demand will replace monetary policy as a more prominent pricing factor.
Dalio emphasized that in addition to the short-term factors discussed above, the United States has also entered a time point of "borrowing money to repay interest" in the long run. When a country's debt growth rate is faster than its income growth, if it wants to maintain its spending level, it needs to borrow more money, which is also the critical point that the United States is at (accelerating).